For many small employers, the expense and administration involved with offering a retirement savings plan can be a deterrent to implementing one at all. A less expensive, and simpler to operate option benefit advisers can work with employers to establish is a SIMPLE IRA.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA plan makes it possible for companies with as few as two employees to establish an IRA, according to Rochester, New York-based Paychex. The plans are designed for businesses with 100 employees or fewer who earn $5,000 or more per year. The employer also cannot currently have another retirement plan.
SIMPLE IRA plans offer tax benefits to the employee and the employer, and can serve as an attractive retention tool for small employers. Nearly half (45%) of employees say their companys retirement program is an important reason to stay with the company, according to a recent study from Towers Watson.
Compared to other types of retirement plans, the Department of Labor says SIMPLE IRA plans offer lower start-up and annual costs and are simpler to operate.
Thats because the financial institution that maintains the plan for the employees handles most of the details of setting the plan up and running it, the DOL adds.
Establishing the plan
Choosing the financial institution to maintain employees' SIMPLE IRAs is one of the most important decisions the employer and adviser can make, because that entity becomes a trustee to the plan, the DOL says.
The following institutions can be designated as trustees of SIMPLE IRA plans: banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS. Trustees work with employers and agree to receive and invest contributions and provide the employer with a summary description of the plan features each year.
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Alternatively, employers can also decide to let employees choose the financial institution that will receive their contributions.
Employers can choose to cover all employees without restriction or can limit the employees covered to those who received at least $5,000 in compensation during any two years prior to the current calendar year and who are reasonably expected to receive at least $5,000 during the current calendar year.
As part of the setup process, employers can choose a model form or other plan document offered by the financial institution. Once completed and signed the selected IRS form (or other plan document, if not using the IRS model form) becomes the plans basic legal document, describing employees rights and benefits.
Employers and their advisers will need to ensure that the plan is kept current with the law.
Under a SIMPLE IRA plan the employer makes contributions to an individual account set up for each eligible employee and employees defer a part of their salaries into the plan for retirement. Each employee is always 100% vested in his or her SIMPLE IRA.
An employer is required to make a contribution to the plan, according to Paychex, and they can choose to make a non-elective contribution of at least 2% of compensation for all eligible employees earning at least $5,000; or make a matching contribution of at least 100% up to the first 3% of compensation.
Employers are not required to contribute the same percentage of compensation every year, according to TIAA-CREF Financial Services. However, the firm adds, in any given year, an employer must contribute the same percentage of compensation for each eligible employee.
Employee Contributions
Employees can make salary reduction contributions in any amount to a SIMPLE IRA plan up to the legal limits. The maximum amount that an employee can contribute in 2015 is $12,500, according to the DOL. Additional employee contributions, so-called catch-up contributions, are allowed for employees age 50 or over. The additional contribution limit is $3,000 in 2015.
Each year, employees can change their contribution levels during the plans election period. The election period must be at least 60 days long, and employees must receive prior notice about an upcoming election opportunity.
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